This article introduces Good Entry, an upcoming derivatives marketplace on Arbitrum that allows you to minimize losses while trading and avoid liquidation due to price fluctuations using Protected Perps.
How did they do it? They leveraged the liquidity of Uniswap v3.
What is Good Entry?
Good Entry (GE) is a derivatives trading platform that allows traders to trade with greater peace of mind by protecting their downside risk.
The protocol aims to create a simple and easy-to-understand platform that protects users from the trouble of liquidation: users cannot be liquidated due to price fluctuations, but only due to time limits.
On the backend, they leveraged:
Uniswap v3 Liquidity Pools
Aave’s lending market
Chainlink Oracles
What are the key features of Good Entry?
Protected Perps for Traders: Liquidation mechanisms prevent users from being liquidated due to price fluctuations, protecting them from unexpected events. In exchange, users pay a funding fee and can only be liquidated due to time limits.
ezVaults: GE is not just for traders. EzVaults aims to help miners optimize their earnings by leveraging automated and user-friendly vaults.
Token economics and reward mechanisms to seek sustainable benefits for token holders: confidential for now. More details will be announced later.
Good Entry Functional Analysis Protected Perps
Now that we’ve briefly covered the concept of Protected Perps, let’s take a closer look at how it works.
The loss from one bad trade requires multiple profitable trades to make up for it. Here is a quick comparison chart.
But as you trade more and more, your losses will also become greater.
Finally, it fell into a vicious cycle.
To help traders avoid being liquidated, protected Perps were created.
In the figure above (fourth column), we show the losses that traders incur on GE compared to traditional trading.
Note that the 1% funding rate for 24 hours is based on extreme circumstances (to emphasize the advantages of trading on GE). Nonetheless, it is worth mentioning that positions on GE will be subject to variable funding based on demand.
This means that users still need to keep an eye on these positions and manage them accordingly: if you leave a position open without checking, you could lose money due to fees.
Risk management will also change accordingly: users can trade as much as they want and can continue trading until they achieve a profit. However, they still need to be careful about the protection they pay.
On the backend, GE Perps differ from traditional perpetual contracts (such as those we see on BitMex).
- Funds are paid by traders to liquidity providers, and the platform takes a commission from the transactions
- By trading Protected Perpetuals, traders are essentially “purchasing options on a block-by-clock basis” until they close their position (funding fees are also calculated and paid on a block-by-clock basis).
Benefits of Protected Perpetual Contracts
Settle by time, not price
Funding fees are actually "protection fees" paid from the margin.
For context, if a trader’s margin reaches a health factor, the protocol will rebalance their positions and pay a 1% fee to LPers. For example, if you have an open position worth $100 with a 100% margin utilization, $5 of it will be rebalanced to bring the margin utilization back to 95%.
How are positions rebalanced?
If the margin utilization exceeds the 99% health factor, a rebalance will occur. Liquidators can close some of your positions to bring your margin utilization back below the 99% threshold.
• No counterparty risk: Unlike the GLP pool model, this model operates based on the GE model. The GE model has no third parties and counterparties, and is based on a simple lending model of Uniswap V3 positions.
This model also allows for zero-slippage trading: traders effectively borrow liquidity from LPers when opening a position, with no impact on the price. When the trade closes, the trader is repaid with the same asset.
• Creating options for altcoins is very complex: GE allows users to buy perpetual options with no expiration date, up to 10x leverage, and instant settlement.
How do protected perpetual options work?
As we have already mentioned, traders actually buy perpetual options block by block.
This is achieved by using a combination of Uniswap V3 “ticks” and the AAVE Lending Market. In effect, traders borrow liquidity from Uniswap V3 when opening a position.
Uniswap V3 ticks are intended to be Uniswap V3 positions, “focused on one price point” (1 tick represents one specific price point).
Let’s use a practical example to highlight the power of a protected perpetual option:
First, we need liquidity providers to provide liquidity to GE ezVaults. This liquidity is distributed across four active Uniswap V3 ticks in the current configuration.
Traders provide margin and place trades.
In this scenario, the ETH price is $2,000 and the trader takes a long position at $2,100.
A trader: provides 0.1 ETH worth $200 as margin, and can use up to 10x leverage: in this case, they hold “$2,000 of the $2,100 quote representing 1 ETH.”
Now what happens if the price changes?
If the price exceeds $2,100, the trader will make money (and the debt held will be converted from ETH to USDC). So, instead of 1 ETH, the user will have $2,000.
As the value of ETH increases and the debt is repaid, the trader recognizes the difference as profit.
What’s more interesting is that users can close their positions at any time.
ezVaults
ezVaults are the easiest way to earn yield on GE! They offer a set-and-forget strategy where users simply deposit collateral and let the vault handle the rest. These vaults are flexible, allowing users to deposit and withdraw at any time.
The vault consists primarily of “multiple Uniswap v3 asset positions” that are automatically rebalanced based on market conditions to optimize yield.
Sources of income:
Swap Profits
When traders make swaps, ezVaults hold positions in Uniswap V3. Liquidity stored in vaults is typically distributed to 4 separate Uniswap V3 locations (tickers). Tickers can also contain different assets. When quotes are below the market price, they are converted to USDC. If they are above the market price, they remain in ETH.
ezVaults profit from Swap transactions, so they become particularly profitable when the price of each symbol is constantly fluctuating within a certain range. Fees earned through Swap are deployed in the vaults and automatically compounded.
Supply APR
ezVaults earn premiums when traders hold perpetual positions. Supply APR is variable and depends on demand and supply.
Token Incentives
Token incentives will be increased every liquidity mining quarter, further increasing the yield.
When a user deposits or withdraws funds, the 4 different Uniswap V3 positions within the vault will be rebalanced. The rebalancing process is automatic and does not require users to actively manage their V3 positions.
Limitations and Risks
Impermanent loss risk: Whenever the market price exceeds the Uniswap price range, assets will be transferred from one symbol to another. However, compared with Uniswap, the impermanent loss risk of ezVaults is relatively low and linearly distributed. In addition, the swap income, lending income, and additional income of ezVaults should compensate (or even exceed) the impermanent loss.
Insufficient withdrawal amount: In some cases of high open interest, liquidity providers may not be able to withdraw funds from ezVaults (or can only withdraw limited amounts). In this case, the borrowing rate for traders will soar, and liquidity providers will enjoy higher returns. Variable interest rates are used to incentivize other liquidity providers to provide liquidity or liquidate existing users.
Technical Risks: Inherent smart contract risks, such as bugs or exploits. To mitigate these risks, the platform undergoes regular third-party audits. Further risks arise from leveraging existing products, such as the Uniswap V3 mining pool.
Future plan
Currently, GE is exiting alpha mode. Users can try out the protocol at: https://alpha.goodentry.io/
The roadmap includes:
Tick-based vault for professional yield farmers
Permissionless vault creation
Good Entry Token
Tokenomics: WEN Token?
This is the projected supply distribution of the tokens in the future:
15% of the supply is allocated through the initial farm sale (public sale): a contribution to the liquidity owned by the protocol, and fees to support protocol development.
5% pre-mining plan, linearly distributed over six months
25% for liquidity mining (more than three years)
15% to partners (5% to Season 1: 3 month cliff followed by 9 month linear lock)
18% held in reserves (pre-minted into multi-signature wallets)
22% for the team (1 year cliff and 3 years linear unlock)
Notably, the project has no venture capital funding and no pre-sale to private investors.
What are the advantages of Good Entry?
Innovative perpetual design: No liquidation! GE is built differently than other derivatives protocols.
Reduced user risk: Most traders are susceptible to liquidation. Introducing a new design mechanism to protect them is an interesting use case. For example, this product may be very attractive to people who are not very familiar with perpetual trading (like most cryptocurrency users). To be fair, GE's protection is designed to prevent large losses, not just liquidation itself: losing 0.0025% of funding fees/hour is much less than a 10% price drawdown.
Alignment of interests with UniV3 LPers: Products built on top of fundamental primitives like Uniswap V3 benefit LPers, who will be able to earn additional fees from liquidity with no additional risk other than impermanent loss.
These additional costs include:
Supply APR: By providing liquidity to traders AMM
Swap income: Narrow fluctuation income from Uniswap V3
